Suppose country X currently produces widgets. Then it establishes a preferential trading agreement with country Y. Following the formation of the PTA, country X no longer produces widgets and imports widgets from country Y. What has occurred?
a. There is trade diversion and a welfare gain for both country X and country Y.
b. There is trade diversion, a welfare gain for country Y, and a welfare loss for country X.
c. There is trade creation and a welfare gain for both country X and country Y.
d. There is trade creation, a welfare gain for country Y, and a welfare loss for country X.
Ans: c. There is trade creation and a welfare gain for both country X and country Y.
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When production costs fall,
a) the aggregate-demand curve shifts to the right. b) the short-run aggregate-supply curve shifts to the right. c) the short-run aggregate-supply curve shifts to the left. d) the aggregate-demand curve shifts to the left.
Starting from long-run equilibrium, a large tax increase will result in a(n) ________ gap in the short-run and ________ inflation and ________ output in the long-run.
A. recessionary; lower; potential B. expansionary; lower; potential C. expansionary; higher; potential D. recessionary; lower; lower